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Chapter 11 - Current Liabilities and Payroll Accounting
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Chapter 11 Current Liabilities and Payroll Accounting
QUESTIONS
1. The three questions are: (1) Who must be paid? (2) When is payment due? (3) How much is to be paid?
2. A current liability is expected to be paid within one year or the company’s operating cycle, whichever is longer. Any liability that is not current is considered to be long term.
3. An estimated liability is an obligation to make a future payment, the exact amount of which is uncertain, but it is capable of being reasonably estimated.
4. The amount of the sale for the item only is $950 ($988/1.04).
5. The combined Social Security tax rate (assuming the maximum wage amount is not yet reached) is 12.4% (6.2% + 6.2%). The maximum level of earnings [wage base on which taxes are due] for 2010 is $106,800.
6. The Medicare tax rate is 1.45%. This rate is applied to all wages earned by an employee—no maximum limit exists.
7. An employee’s gross earnings along with the number of withholding allowances that an employee claims, as well as whether they are married or single, determine the amount deducted for federal income taxes.
8. The employee is responsible for federal income taxes, state income taxes, local income taxes (if any), and the employee portion of the FICA taxes. The employer is responsible for both federal and state unemployment taxes and the employer portion of the FICA taxes.
9. An unemployment merit rating is based on an evaluation of an employer’s experience in creating or avoiding unemployment with its employees. The merit rating affects the state unemployment taxes that the employer must pay. Merit ratings cause more of the cost of unemployment benefits to be paid by those who create more unemployment.
10. The obligation to correct or replace defective products (or services) is created when the products are sold with the warranties. Even though the seller does not know with certainty when the obligation will be paid, to whom it will be paid, or the amount to be paid, past experience shows that some amount will probably be paid. If the seller can reasonably estimate that amount, the warranty liability must be reported on the balance sheet.
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11. There are no conditions in which a probable loss tied to a future event can create a liability, regardless of its probability. A liability is an obligation created by a past event, not by a future event. If a disaster occurs, the company must report the loss in the period when it occurs.
12.A A wage bracket withholding table shows for a pay period of a given length (weekly, biweekly, semimonthly, monthly), the amounts of federal income taxes to be withheld from the pay of an employee, at varying amounts of gross pay and varying numbers of withholding allowances.
13.A Single employee earning $725 with two allowances has $76 taxes withheld. Single employee earning $625 with no allowances has $81 taxes withheld.
14. At February 27, 2010, Research In Motion reports ―Deferred revenue‖ in the amount of $67,573 ($ in thousands).
15. At September 26, 2009, Apple reports Accounts payable of $5,601 million.
16. At December 31, 2009, Nokia reports six current liabilities: Current portion of long-term loans; Short-term borrowings; Other financial liabilities; Accounts payable; Accrued expenses; and Provisions.
17. Palm’s current liabilities include one income-tax-related liability titled ―Income taxes payable‖. This account reflects taxes that must be paid to the government in the short term.
Instructor note: Palm also has one noncurrent income-tax-related account on its balance sheet. This account is titled ―Non-current tax liabilities.‖
QUICK STUDIES Quick Study 11-1 (5 minutes) Items 1, 3, 5, 6 are current liabilities for this company.
Quick Study 11-2 (10 minutes) Sept. 30 Cash .......................................................................... 5,200 Sales ................................................................... 5,000 Sales Taxes Payable ......................................... 200 To record cash sales and 4% sales tax.
Sept. 30 Cost of Goods Sold ................................................. 2,900 Merchandise Inventory ..................................... 2,900 To record cost of Sept. 30th sales.
Oct. 15 Sales Taxes Payable ............................................... 200 Cash .................................................................... 200 To record remittance of sales taxes to govt.
Chapter 11 - Current Liabilities and Payroll Accounting
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Quick Study 11-3 (10 minutes) Oct. 31 Cash .......................................................................... 5,500,000 Unearned Ticket Revenue ................................. 5,500,000 To record sales in advance of concerts.
Nov. 8 Unearned Ticket Revenue ....................................... 1,375,000 Earned Ticket Revenue ..................................... 1,375,000 To record concert revenues earned.
($5,500,000 / 4 dates = $1,375,000)
Quick Study 11-4 (10 minutes)
1. (b); reason—is reasonably estimated but not a probable loss.
2. (b); reason—probable loss but cannot be reasonably estimated.
3. (a); reason—can be reasonably estimated and loss is probable. Quick Study 11-5 (15 minutes) 1. Computation of interest payable at December 31, 2011:
Days from November 7 to December 31 .................... 54 days Accrued interest (8% x $150,000 x 54/360) ................ $1,800
2. 2011
Dec.31 Interest Expense ...................................................... 1,800 Interest Payable ................................................ 1,800 To record payment of note plus interest
(8% x $150,000 x 54/360).
3. 2012
Feb. 5 Interest Expense* .................................................... 1,200 Interest Payable ....................................................... 1,800 Notes Payable .......................................................... 150,000 Cash .................................................................... 153,000 To record payment of note plus interest
*(8% x $150,000 x 36/360).
Chapter 11 - Current Liabilities and Payroll Accounting
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Quick Study 11-6 (15 minutes)
Jan. 14 Sales Salaries Expense ........................................... 14,000
FICA—Social Sec. Taxes Payable* .................. 868
FICA—Medicare Taxes Payable** .................... 203
Employee Fed. Inc. Taxes Payable .................. 2,600
Employee Medical Insurance Payable ............. 309
Employee Union Dues Payable ........................ 120
Salaries Payable ................................................ 9,900
To record payroll for period.
* $14,000 x 6.2% ** $14,000 x 1.45%
Quick Study 11-7 (15 minutes)
[Note: Two months (January and February) of earnings have already been recorded for each of the 10 employees.]
Mar. 31 Payroll Taxes Expense ............................................ 2,770.00 FICA—Social Security Taxes Payable1 ............ 1,240.00 FICA—Medicare Taxes Payable2 ....................... 290.00 State Unemployment Taxes Payable3 .............. 1,080.00 Federal Unemployment Taxes Payable4 .......... 160.00
To record employer payroll taxes. 1(10 x $2,000) x 6.2% = $1,240.00 2(10 x $2,000) x 1.45% = $290.00 3(10 x $2,000 [check $2,000 under max: $7,000 – {$2,000 x 2}]) x 5.4% = $1,080.00 4(10 x $2,000 [check $2,000 under max: $7,000 – {$2,000 x 2}]) x 0.8% = $160.00
Quick Study 11-8 (10 minutes)
2011
July 24 Estimated Warranty Liability .................................. 35 Repair Parts Inventory ....................................... 35 To record cost of warranty repairs.
Quick Study 11-9 (5 minutes) Dec. 31 Employee Bonus Expense ...................................... 10,000 Bonus Payable ................................................. 10,000 To record expected bonus costs.
Quick Study 11-10 (5 minutes)
Chapter 11 - Current Liabilities and Payroll Accounting
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Vacation Benefits Expense* ................................... 307.69 Vacation Benefits Payable .............................. 307.69 To record vacation benefits accrued.
* ($4,000-3,692.31)
Quick Study 11-11 (10 minutes) Times interest earned = = 5.8 times Interpretation: This company’s times interest earned ratio of 5.8 exceeds (is superior to) its competitors’ average ratio of 4.0. A times interest earned of 5.8 suggests sufficient income to cover interest obligations. Quick Study 11-12A (15 minutes) Gross Pay ............................................................................ $735.00 Social Security tax deduction (6.2%) .............................. $45.57 Medicare tax deduction (1.45%) ...................................... 10.66 Federal income tax deduction (from Exhibit 11A.6) ...... 93.00 State income tax deduction (1.0%) ................................. 7.35 Total deductions ............................................................... 156.58
Net Pay ................................................................................. $578.42
Quick Study 11-13B (10 minutes)
Dec. 31 Income Taxes Expense ........................................... 30,000 Income Taxes Payable ...................................... 22,000 Deferred Income Tax Liability .......................... 8,000 To record tax expense and deferred tax liability.
Quick Study 11-14 (10 minutes)
a. The definitions and characteristics of current liabilities are broadly similar for both U.S. GAAP and IFRS. Although differences exist, the similarities vastly outweigh any differences.
b. Examples of financial liabilities under IFRS include interest-bearing loans and borrowings, and trade (account) and other payables.
$2,044,000
$350,000
Chapter 11 - Current Liabilities and Payroll Accounting
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EXERCISES Exercise 11-1 (10 minutes) 1. C 3. N 5. C 7. C 9. L
2. C 4. C 6. C 8. C 10. L
Exercise 11-2 (10 minutes)
[Note: All entries dated December 31, 2011] 1. Cash .......................................................................... 2,100,000 Sales .................................................................... 2,000,000 Sales Taxes Payable .......................................... 100,000 To record sales and sales taxes.
Cost of Goods Sold .................................................. 1,000,000 Merchandise Inventory ...................................... 1,000,000 To record cost of sales.
2. Unearned Services Revenue ................................... 40,000 Earned Services Revenue ................................. 40,000 To record product revenue earned.
Exercise 11-3 (10 minutes)
[Note: All entries dated December 31, 2011.] 1. No adjusting entry can be made since the loss cannot be reasonably
estimated. Disclosure of the suit as a contingent liability should be made in the notes to the financial statements.
2. No adjusting entry is required since it is not probable that the supplier will
default on the debt. The guarantor, Moor Company, should describe the guarantee in its financial statement notes as a contingent liability.
Exercise 11-4 (30 minutes) 1. Maturity date = May 15 + 60 days = July 14, 2011 2a. May 15 Cash .......................................................................... 94,000 Notes Payable .................................................... 94,000 Borrowed cash by issuing an interest-bearing note.
Chapter 11 - Current Liabilities and Payroll Accounting
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Exercise 11-4 (Concluded)
2b. July 14 Interest Expense* .................................................... 1,880 Notes Payable .......................................................... 94,000 Cash .................................................................... 95,880 Repaid note plus interest.
* Principal ................................. $94,000 x Interest rate ......................... 12% x Fraction of year .................. 60/360 Total interest .......................... $ 1,880
Exercise 11-5 (30 minutes) 1. Maturity date = November 1 + 90 days = January 30, 2012. 2. Principal ..................................................... $150,000 x Interest rate ............................................. 9% x Fraction of year (Nov. 1 – Dec. 31)........ 60/360 Total interest in 2011 ................................. $ 2,250
3. Principal ..................................................... $150,000 x Interest rate ............................................. 9% x Fraction of year (Jan. 1 – Jan. 30)......... 30/360 Total interest in 2012 ................................. $ 1,125 4a. 2011 Nov. 1 Cash .......................................................................... 150,000 Notes Payable .................................................... 150,000 Borrowed cash by issuing an interest-bearing note.
4b. 2011 Dec. 31 Interest Expense ...................................................... 2,250 Interest Payable ................................................. 2,250 Accrued interest on note payable.
4c.
2012 Jan. 30 Interest Expense ...................................................... 1,125 Interest Payable ....................................................... 2,250 Notes Payable .......................................................... 150,000 Cash .................................................................... 153,375 Repaid note plus interest.
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Exercise 11-6 (20 minutes)
Subject to Tax
Rate
Tax
Explanation
a. FICA--Social Security ........... $ 800 6.20% $ 49.60 Full amount is subject to tax.
FICA—Medicare ..................... 800 1.45 11.60 Full amount is subject to tax.
FUTA .......................................... 600 0.80 4.80 $200 is over the maximum.
SUTA .......................................... 600 2.90 17.40 $200 is over the maximum. b. FICA--Social Security ........... $2,100 6.20% $130.20 Full amount is subject to tax.
FICA—Medicare ..................... 2,100 1.45 30.45 Full amount is subject to tax.
FUTA .......................................... 0 0.80 0.00 Full amount is over maximum.
SUTA .......................................... 0 2.90 0.00 Full amount is over maximum. c. FICA--Social Security ........... $6,300 6.20% $390.60 $1,700 is over the maximum.
FICA—Medicare ..................... 8,000 1.45 116.00 Full amount is subject to tax.
FUTA .......................................... 0 0.80 0.00 Full amount is over maximum.
SUTA .......................................... 0 2.90 0.00 Full amount is over maximum.
Exercise 11-7 (10 minutes) Sept. 30 Salaries Expense ..................................................... 800.00 FICA—Social Security Taxes Payable ............. 49.60 FICA—Medicare Taxes Payable ....................... 11.60 Employee Federal Income Taxes Payable ......... 135.00 Accrued Payroll Payable ................................... 603.80 To record payroll for pay period ended September 30.
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Exercise 11- 8 (10 minutes) Sept. 30 Payroll Taxes Expense ............................................ 83.40 FICA—Social Security Taxes Payable ............. 49.60 FICA—Medicare Taxes Payable ....................... 11.60 Federal Unemployment Taxes Payable ........... 4.80 State Unemployment Taxes Payable ............... 17.40 To record employer payroll taxes.
Exercise 11-9 (15 minutes) 1. B = 0.03 ($1,000,000 – B)
B = $30,000 – 0.03B 1.03B = $30,000 B = $29,126 (rounded to nearest dollar)
2. 2011 Dec. 31 Employee Bonus Expense ................................ 29,126
Bonus Payable .......................................... 29,126 To record expected bonus costs.
3. 2012 Jan. 19 Bonus Payable .................................................... 29,126 Cash ........................................................... 29,126
To record payment of bonus.
Exercise 11-10 (10 minutes)
[Note: All entries dated December 31, 2011.] 1. Warranty Expense.......................................................... 3,600 Estimated Warranty Liability .................................. 3,600 To record warranty expense [3,000 units x 8% x $15].
2. Vacation Benefits Expense ........................................... 2,400 Vacation Benefits Payable ...................................... 2,400 To record vacation benefits expense
[20 employees x 1 day x $120].
Chapter 11 - Current Liabilities and Payroll Accounting
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Exercise 11-11 (25 minutes) 1. Warranty Expense = 4% of dollar sales = 4% x $5,500 = $220 2. The December 31, 2011, balance of the liability equals the expense
because no repairs are provided in 2011. Therefore, the ending balance of the Estimated Warranty Liability account is $220.
3. The company should report no additional warranty expense in 2012 for
this copier. 4. The December 31, 2012, balance of the Estimated Warranty Liability
account equals the 2012 beginning balance minus the costs incurred in 2012 to repair the copier:
Beginning 2011 balance .................. $220 Less parts cost ................................ (199) Ending 2012 balance ....................... $ 21
5. Journal entries: 2011 (a) Aug. 16 Cash .......................................................................... 5,500 Sales ................................................................... 5,500 To record cash sale of copier.
Aug. 16 Cost of Goods Sold ................................................. 3,800 Merchandise Inventory ..................................... 3,800 To record cost of August 16 sale.
(b)
Dec. 31 Warranty Expense ................................................... 220 Estimated Warranty Liability ............................ 220 To record warranty expense for copier sold in 2011.
2012 (c) Nov. 22 Estimated Warranty Liability .................................. 199
Repair Parts Inventory ...................................... 199 To record cost of warranty repairs.
Chapter 11 - Current Liabilities and Payroll Accounting
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Exercise 11-12 (15 minutes)
(a) (b) (c) (d) (e) (f) Numerator Income before interest & taxes ....
$223,000
$205,000
$218,000
$407,000
$121,000
$ 8,000
Denominator Interest expense ...... $ 48,000 $ 15,000 $ 8,000 $ 12,000 $ 12,000 $12,000 Ratio ...................... 4.65 13.67 27.25 33.92 10.08 0.67
Analysis: Company (d) has the strongest ability to pay interest expense as it comes due as evidenced by the company’s times interest earned (coverage) ratio of 33.92 times. Exercise 11-13A (15 minutes) Regular pay (40 hours @ $12) ........................................... $480.00
Overtime premium pay (8 hours @ [$12 x 150%]) ........... 144.00
Gross pay .......................................................................... 624.00
FICA—Social Security tax deduction (6.2%) .................... $ 38.69
FICA—Medicare tax deduction (1.45%) ............................ 9.05
Income tax deduction (from Exhibit 11A.6) ...................... 61.00
Total deductions ............................................................... 108.74
Net pay ................................................................................. $515.26
Chapter 11 - Current Liabilities and Payroll Accounting
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Exercise 11-14B (25 minutes)
1. Income Taxes Payable (target balance) ............................................... $29,100 Total accrued [($27,900 + $18,200 + $32,700) x .30] ............................ 23,640 Adjustment (additional expense) .......................................................... $ 5,460 2. 2011 (a) Dec. 31 Income Tax Expense ................................................ 5,460 Income Taxes Payable ....................................... 5,460 To adjust tax expense and liability.
2012 (b) Jan. 20 Income Taxes Payable ............................................. 29,100 Cash ..................................................................... 29,100 To make the final quarterly payment
of income taxes for 2011.
Exercise 11-15 (25 minutes) 1. Warranty Expense ................................................... 6,201 Estimated Warranty Liability ............................ 6,201 To record warranty expense and liability.
2. Estimated Warranty Liability .................................. 5,220 Inventory............................................................. 5,220 To record cost of warranty replacements.
3. Volvo would report warranty expense of $6,201 for 2008.
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Exercise 11-16 (30 minutes) (1)
July 31 Sales Salaries Expense ........................................... 120,000
Office Salaries Expense .......................................... 60,000
FICA—Social Sec. Taxes Payable .................... 11,160
FICA—Medicare Taxes Payable ........................ 2,610
Employee Fed. Inc. Taxes Payable ................... 45,000
Employee State Inc. Taxes Payable ................. 10,000
Employee Medical Insurance Payable* ............ 2,800
Employee Life Insurance Payable** ................. 1,600
Employee Union Dues Payable ......................... 1,000
Salaries Payable ................................................. 105,830 To record payroll for period.
* $7,000 x 40% ** $4,000 x 40%
(2)
July 31 Salaries Payable ....................................................... 105,830
Cash .................................................................... 105,830 To record payment of payroll.*
*Check numbers may be entered in the Payroll Register.
(3)
July 31 Payroll Taxes Expense ............................................ 23,470
FICASocial Sec. Taxes Payable .................... 11,160 FICAMedicare Taxes Payable ........................ 2,610 State Unemployment Taxes Payable................ 2,700 Federal Unemployment Taxes Payable ........... 400
Employee Medical Insurance Payable* ............ 4,200
Employee Life Insurance Payable** ................. 2,400 To record employer payroll taxes and expenses. SUTA = $50,000 x 5.4% = $2,700 FUTA = $50,000 x 0.8% = $400 FICA—Social Sec. & Medicare = Same as employees * $7,000 x 60% ** $4,000 x 60%
(4)
July 31 FICASocial Security Taxes Payable.................... 22,320 FICAMedicare Taxes Payable .............................. 5,220 Employee Fed. Income Taxes Payable. ................. 45,000 Employee State Income Taxes Payable. ................ 10,000 Employee Medical Insurance Payable ................... 7,000
Employee Life Insurance Payable .......................... 4,000
Employee Union Dues Payable ............................... 1,000
State Unemployment Taxes Payable ...................... 2,700
Federal Unemployment Taxes Payable.................. 400 Cash .................................................................... 97,640
To record payment of FICA, income taxes, SUTA, FUTA, union dues, and insurance premiums.
Chapter 11 - Current Liabilities and Payroll Accounting
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PROBLEM SET A Problem 11-1A (45 minutes)
Frier Com. Bank UMB
1. Maturity dates Date of the note .............................. May 19 July 8 Nov. 28 Term of the note (in days) ............. 90 120 60 Maturity date ................................... Aug. 17 Nov. 5 Jan. 27
2. Interest due at maturity Principal of the note ...................... $30,000 $60,000 $21,000 Annual interest rate ....................... 9% 10% 8% Fraction of year .............................. 90/360 120/360 60/360 Interest expense............................. $ 675 $ 2,000 $ 280
3. Accrued interest on UMB note at the end of 2010 Total interest for note .................................................... $ 280 Fraction of term in 2010 ................................................ 33/60 Accrued interest expense ............................................. $ 154
4. Interest on UMB note in 2011 Total interest for note .................................................... $ 280 Fraction of term in 2011 ................................................ 27/60 Interest expense in 2011 ............................................... $ 126
Chapter 11 - Current Liabilities and Payroll Accounting
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Problem 11-1A (Concluded) 5.
2010 Apr. 20 Merchandise Inventory ........................................... 38,500 Accounts Payable—Frier .................................. 38,500 Purchased merchandise on credit.
May 19 Accounts Payable—Frier ........................................ 38,500
Cash .................................................................... 8,500 Notes Payable—Frier ........................................ 30,000 Paid $8,500 cash and gave a 90-day,
9% note to extend due date on account.
July 8 Cash .......................................................................... 60,000 Notes Payable—Community ............................. 60,000 Borrowed cash with a 120-day, 10% note.
Aug. 17 Interest Expense ...................................................... 675 Notes Payable—Frier .............................................. 30,000 Cash .................................................................... 30,675 Paid note with interest.
Nov. 5 Interest Expense ...................................................... 2,000
Notes Payable—Community ................................... 60,000 Cash .................................................................... 62,000 Paid note with interest.
28 Cash .......................................................................... 21,000
Notes Payable—UMB Bank .............................. 21,000 Borrowed cash with 60-day, 8% note.
Dec. 31 Interest Expense ...................................................... 154 Interest Payable ................................................. 154 Accrued interest on note payable.
2011 Jan. 27 Interest Expense ...................................................... 126 Notes Payable—UMB Bank .................................... 21,000 Interest Payable ...................................................... 154 Cash .................................................................... 21,280 Paid note with interest.
Chapter 11 - Current Liabilities and Payroll Accounting
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Problem 11-2A (40 minutes) 1. 2010 Nov. 11 Cash .......................................................................... 6,000 Sales ................................................................... 6,000 Sold razors to customers.
11 Cost of Goods Sold ................................................. 1,350
Merchandise Inventory ..................................... 1,350 To record cost of November 11 sale (75 x $18).
30 Warranty Expense ................................................... 420
Estimated Warranty Liability ............................ 420 To record razor warranty expense
and liability at 7% of selling price.
Dec. 9 Estimated Warranty Liability .................................. 270 Merchandise Inventory ..................................... 270 To record cost of razor warranty
replacements (15 x $18).
16 Cash .......................................................................... 16,800
Sales ................................................................... 16,800 Sold razors to customers.
16 Cost of Goods Sold ................................................. 3,780
Merchandise Inventory ..................................... 3,780 To record cost of December 16 sale (210 x $18).
29 Estimated Warranty Liability .................................. 540 Merchandise Inventory ..................................... 540 To record cost of razor warranty
replacements (30 x $18).
31 Warranty Expense ................................................... 1,176
Estimated Warranty Liability ............................ 1,176 To record razor warranty expense
and liability at 7% of selling price.
Chapter 11 - Current Liabilities and Payroll Accounting
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Problem 11-2A (Concluded) 2011 Jan. 5 Cash .......................................................................... 10,400 Sales ................................................................... 10,400 Sold razors to customers.
5 Cost of Goods Sold ................................................. 2,340
Merchandise Inventory ..................................... 2,340 To record cost of January 5 sale (130 x $18).
17 Estimated Warranty Liability .................................. 900
Merchandise Inventory ..................................... 900 To record cost of razor warranty
replacements (50 x $18).
31 Warranty Expense ................................................... 728
Estimated Warranty Liability ............................ 728 To record razor warranty expense
and liability at 7% of selling price.
2. Warranty expense for November 2010 and December 2010
Sales Percent Warranty Expense
November ................. $ 6,000 7% $ 420 December .................. 16,800 7 1,176 Total .......................... $22,800 $1,596
3. Warranty expense for January 2011
Sales in January .............................. $10,400 Warranty percent ............................. 7% Warranty expense ........................... $ 728
4. Balance of the estimated liability as of December 31, 2010
Warranty expense for November .................................... $ 420 credit Warranty expense for December .................................... 1,176 credit Cost of replacing items in December (45 x $18)* .......... (810) debit Estimated Warranty Liability balance ............................ $ 786
1,050 credit
*Can be viewed as $270 + $540
5. Balance of the estimated liability as of January 31, 2011 Beginning balance .......................................................... $ 786 credit Warranty expense for January ...................................... 728 credit Cost of replacing items in January (50 x $18) .............. ( 900) debit Estimated Warranty Liability balance ........................... $ 614 credit
Chapter 11 - Current Liabilities and Payroll Accounting
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Problem 11-3A (60 minutes) 1. Ace Co. = = 3.33 2. Deuce Co. = = 1.54 3. Sales increase by 30% (multiply prior sales by 1.3)
Ace Co. Deuce Co.
Sales ............................................. $650,000 $650,000 Variable expenses ...................... 520,000 390,000 Income before interest ............... 130,000 260,000 Interest expense (fixed) .............. 30,000 130,000
Net income ................................... $100,000 $130,000
Net income increases by* .......... 43% 86%
* Computed as the increase in net income divided by prior net income. 4. Sales increase by 50% (multiply prior sales by 1.5)
Ace Co. Deuce Co.
Sales ............................................. $750,000 $750,000 Variable expenses ...................... 600,000 450,000 Income before interest ............... 150,000 300,000 Interest expense (fixed) .............. 30,000 130,000 Net income ................................... $120,000 $170,000
Net income increases by ............ 71% 143%
5. Sales increase by 80% (multiply prior sales by 1.8)
Ace Co. Deuce Co.
Sales ............................................. $900,000 $900,000 Variable expenses ...................... 720,000 540,000 Income before interest ............... 180,000 360,000 Interest expense (fixed) .............. 30,000 130,000 Net income ................................... $150,000 $230,000
Net income increases by ............ 114% 229%
Income before interest & taxes
Interest expense
Income before interest & taxes
Interest expense
$100,000
$30,000
$200,000
$130,000
Chapter 11 - Current Liabilities and Payroll Accounting
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Problem 11-3A (Concluded) 6. Sales decrease by 10% (multiply prior sales by 0.9)
Ace Co. Deuce Co.
Sales ........................................ $450,000 $450,000 Variable expenses ................. 360,000 270,000 Income before interest .......... 90,000 180,000 Interest expense (fixed) ......... 30,000 130,000 Net income .............................. $ 60,000 $ 50,000
Net income decreases by ...... -14% -29%
7. Sales decrease by 20% (multiply prior sales by 0.8)
Ace Co. Deuce Co.
Sales ........................................ $400,000 $400,000 Variable expenses ................. 320,000 240,000 Income before interest .......... 80,000 160,000 Interest expense (fixed) ......... 30,000 130,000 Net income .............................. $ 50,000 $ 30,000
Net income decreases by ...... -29% -57%
8. Sales decrease by 40% (multiply prior sales by 0.6)
Ace Co. Deuce Co.
Sales ........................................ $300,000 $300,000 Variable expenses ................. 240,000 180,000 Income before interest .......... 60,000 120,000 Interest expense (fixed) ......... 30,000 130,000 Net income .............................. $ 30,000 $ (10,000)
Net income decreases by ...... -57% -114%
9. The higher fixed cost strategy (having more fixed interest expense) of
Deuce Co. accentuates the effects of increases and decreases in sales. That is, increases in sales produce greater increases in net income and decreases in sales produce greater decreases in net income. The higher fixed cost strategy of Deuce Co. is indicated by a lower value of the times interest earned ratio.
The higher fixed cost strategy works fine if the sales level increases. Deuce Co. enjoys greater percent increases in its net income because it has made this choice (see parts 3, 4, and 5).
The lower fixed cost strategy protects the company if the sales level decreases. Ace Co. experiences smaller percent decreases in its net income because it has made this choice (see parts 6, 7, and 8).
Chapter 11 - Current Liabilities and Payroll Accounting
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Problem 11-4A (60 minutes) 1. Each employee’s FICA withholdings for Social Security
Dale Ted Kate Chas Total
Maximum base ............ $106,800 $106,800 $106,800 $106,800 Earned through 8/18 ... 105,300 36,650 6,750 1,050 Amount subject to tax $ 1,500 $ 70,150 $100,050 $105,750 Earned this week ......... $ 2,000 $ 900 $ 450 $ 400
Subject to tax ............... 1,500 900 450 400 Tax rate ........................ 6.20% 6.20% 6.20% 6.20%
Social Security tax ...... $ 93.00 $ 55.80 $ 27.90 $ 24.80 $201.50 2. Each employee’s FICA withholdings for Medicare (no limits)
Dale Ted Kate Chas Total
Earned this week ......... $ 2,000 $ 900 $ 450 $ 400 Tax rate ........................ 1.45% 1.45% 1.45% 1.45%
Medicare tax ................ $ 29.00 $ 13.05 $ 6.53 $ 5.80 $ 54.38 3. Employer’s FICA taxes for Social Security
Dale Ted Kate Chas Total
Amount from part 1 ..... $ 93.00 $ 55.80 $ 27.90 $ 24.80 $201.50 4. Employer’s FICA taxes for Medicare
Dale Ted Kate Chas Total
Amount from part 2 ..... $ 29.00 $ 13.05 $ 6.53 $ 5.80 $ 54.38
Chapter 11 - Current Liabilities and Payroll Accounting
11-21
Problem 11-4A (Concluded) 5. Employer’s FUTA taxes Dale Ted Kate Chas Total
Maximum base .............. $ 7,000 $ 7,000 $ 7,000 $ 7,000 Earned through 8/18 ..... 105,300 36,650 6,750 1,050 Amount subject to tax .. 0 0 250 5,950 Earned this week ......... $ 2,000 $ 900 $ 450 $ 400 Subject to tax ............... 0 0 250 400 Tax rate ........................ 0.8% 0.8% 0.8% 0.8% FUTA tax ...................... $ 0.00 $ 0.00 $ 2.00 $ 3.20 $ 5.20
6. Employer’s SUTA taxes
Dale Ted Kate Chas Total
Subject to tax (from 5) $ 0 $ 0 $ 250 $ 400 Tax rate ........................ 2.15% 2.15% 2.15% 2.15% SUTA tax ...................... $ 0.00 $ 0.00 $ 5.38 $ 8.60
10.60 $ 13.98
7. Each employee’s net (take-home) pay
Dale Ted Kate Chas Total
Gross earnings ............. $2,000.00 $900.00 $450.00 $400.00 $3,750.00 Less FICA Social Sec. tax .... (93.00) (55.80) (27.90) (24.80) (201.50) FICA Medicare taxes .... (29.00) (13.05) (6.53) (5.80) (54.38) Withholding taxes ........ (252.00) (99.00) (54.00) (36.00) (441.00) Health insurance .......... (16.00) (16.00) (16.00) (16.00) (64.00) Take-home pay ............. $1,610.00 $716.15 $345.57 $317.40 $2,989.12
8. Employer’s total payroll-related expense for each employee
Dale Ted Kate Chas Total
Gross earnings .............. $2,000.00 $ 900.00 $450.00 $400.00 $3,750.00 Plus FICA Social Sec. tax ...... 93.00 55.80 27.90 24.80 201.50 FICA Medicare taxes ..... 29.00 13.05 6.53 5.80 54.38 FUTA tax ......................... 0.00 0.00 2.00 3.20 5.20 SUTA tax ......................... 0.00 0.00 5.38 8.60 13.98 Health insurance ............ 16.00 16.00 16.00 16.00 64.00 Pension contrib. (8%) .... 160.00 72.00 36.00 32.00 300.00 Total payroll expense .... $2,298.00 $1,056.85 $543.81 $490.40 $4,389.06
Chapter 11 - Current Liabilities and Payroll Accounting
11-22
Problem 11-5A (25 minutes) Part 1
Jan. 8 Office Salaries Expense .......................................... 11,380.00
Sales Salaries Expense ........................................... 32,920.00
FICA—Social Sec. Taxes Payable* .................. 2,746.60
FICA—Medicare Taxes Payable** .................... 642.35
Employee Fed. Inc. Taxes Payable .................. 6,340.00
Employee Medical Insurance Payable ............. 670.00
Employee Union Dues Payable ........................ 420.00
Salaries Payable ................................................ 33,481.05
To record payroll for period.
* $44,300 x 6.2% ** $44,300 x 1.45%
Part 2
Jan. 8 Payroll Taxes Expense ............................................ 5,515.35
FICA—Social Sec. Taxes Payable .................... 2,746.60
FICA—Medicare Taxes Payable ....................... 642.35
State Unemployment Taxes Payable* .............. 1,772.00
Federal Unemployment Taxes Payable** ........... 354.40
To record employer payroll taxes.
* $44,300 x .04 = $1,772.00
**$44,300 x .008 = $354.40
Chapter 11 - Current Liabilities and Payroll Accounting
11-23
Problem 11-6AA (50 minutes)
Mar. 15 FICASocial Security Taxes Payable ................... 3,224
FICAMedicare Taxes Payable ............................. 754
Employee Fed. Income Taxes Payable. ................. 3,900 Cash .................................................................... 7,878 To record payment of FICA and federal
income taxes.
31 Office Salaries Expense .......................................... 10,400 Shop Wages Expense ............................................. 15,600 FICASocial Sec. Taxes Payable .................... 1,612
FICAMedicare Taxes Payable ....................... 377
Employee Fed. Income Taxes Payable ............ 3,900 Salaries Payable ................................................ 20,111 To record payroll for period.
31 Salaries Payable ...................................................... 20,111 Cash .................................................................... 20,111 To record payment of payroll.*
*The check numbers may be entered in the Payroll Register.
31 Payroll Taxes Expense* ........................................... 2,853 FICASocial Sec. Taxes Payable .................... 1,612
FICAMedicare Taxes Payable ....................... 377
State Unemployment Taxes Payable ............... 720 Federal Unemployment Taxes Payable ........... 144 To record employer payroll taxes. *Amount earned through 2/28 = 2 x $2,600 = $5,200 Subject to SUTA/FUTA in March = $7,000 - $5,200 = $1,800 SUTA = $1,800 x 10 employees x 4.0% = $720 FUTA = $1,800 x 10 employees x 0.8% = $144 FICASocial Security Taxes = $1,612 (same as employees)
FICAMedicare Taxes = $377 (same as employees)
Chapter 11 - Current Liabilities and Payroll Accounting
11-24
Problem 11-6AA (Concluded) Apr. 15 FICASocial Security Taxes Payable ................... 3,224
FICAMedicare Taxes Payable ............................. 754
Employee Fed. Income Taxes Payable .................. 3,900 Cash .................................................................... 7,878 To record payment of FICA and
federal income taxes.
15 State Unemployment Taxes Payable ..................... 2,800 Cash .................................................................... 2,800 To record payment of SUTA taxes [$2,080 + $720].
30 Federal Unemployment Taxes Payable ................. 560 Cash .................................................................... 560 To record payment of FUTA taxes [$416 + $144].
30 No entry required upon mailing Form 941.
Chapter 11 - Current Liabilities and Payroll Accounting
11-25
PROBLEM SET B Problem 11-1B (45 minutes)
Quinn Products
Blackhawk Bank
City Bank
1. Maturity dates
Date of the note ................................ May 23 July 15 Dec. 6 Term of the note (in days) ............... 60 120 45 Maturity date ..................................... July 22 Nov. 12 Jan. 20 2. Interest due at maturity
Principal of the note ......................... $3,600 $ 9,000 $16,000 Annual interest rate ......................... 15% 10% 9% Fraction of year ................................ 60/360 120/360 45/360 Interest expense ............................... $ 90 $ 300 $ 180
3. Accrued interest on City Bank note at the end of 2010
Total interest for note ................................................................ $ 180 Fraction of term in 2010 ............................................................. 25/45 Accrued interest expense ......................................................... $ 100
4. Interest on City Bank note in 2011
Total interest for note ................................................................ $ 180 Fraction of term in 2011 ............................................................. 20/45 Interest expense in 2011............................................................ $ 80
Chapter 11 - Current Liabilities and Payroll Accounting
11-26
Problem 11-1B (Concluded) 5. 2010 Apr. 22 Merchandise Inventory ........................................... 4,000 Accounts PayableQuinn Products ............... 4,000 Purchased merchandise on credit.
May 23 Accounts PayableQuinn Products ..................... 4,000
Cash .................................................................... 400 Notes PayableQuinn Products ..................... 3,600 Paid $400 cash and gave a 60-day,
15% note to extend due date on account.
July 15 Cash .......................................................................... 9,000 Notes PayableBlackhawk Bank .................... 9,000 Borrowed cash with a 120-day, 10% note.
22 Interest Expense ...................................................... 90
Notes PayableQuinn Products ........................... 3,600
Cash .................................................................... 3,690 Paid note with interest.
Nov. 12 Interest Expense ...................................................... 300 Notes PayableBlackhawk Bank .......................... 9,000
Cash .................................................................... 9,300 Paid note with interest.
Dec. 6 Cash .......................................................................... 16,000 Notes PayableCity Bank ................................ 16,000 Borrowed cash with a 45-day, 9% note.
31 Interest Expense ...................................................... 100 Interest Payable ................................................. 100 Accrued interest on note payable.
2011 Jan. 20 Interest Expense ...................................................... 80 Interest Payable ....................................................... 100 Notes PayableCity Bank ...................................... 16,000
Cash .................................................................... 16,180 Paid note with interest.
Chapter 11 - Current Liabilities and Payroll Accounting
11-27
Problem 11-2B (40 minutes) 1. 2011 Nov. 16 Cash .......................................................................... 1,750 Sales ................................................................... 1,750 Sold coffee grinders to customers.
16 Cost of Goods Sold ................................................. 700
Merchandise Inventory ..................................... 700 To record cost of November 16 sale (50 x $14).
30 Warranty Expense ................................................... 175
Estimated Warranty Liability ............................ 175 To record coffee grinder warranty expense
and liability at 10% of selling price.
Dec. 12 Estimated Warranty Liability .................................. 84 Merchandise Inventory ..................................... 84 To record cost of coffee grinder
warranty replacements (6 x $14).
18 Cash .......................................................................... 5,250
Sales ................................................................... 5,250 Sold coffee grinders to customers.
18 Cost of Goods Sold ................................................. 2,100
Merchandise Inventory ..................................... 2,100 To record cost of December 18 sale (150 x $14).
28 Estimated Warranty Liability .................................. 238
Merchandise Inventory ..................................... 238 To record cost of coffee grinder
warranty replacements (17 x $14).
31 Warranty Expense ................................................... 525
Estimated Warranty Liability ............................ 525 To record coffee grinder warranty expense
and liability at 10% of selling price.
Chapter 11 - Current Liabilities and Payroll Accounting
11-28
Problem 11-2B (Concluded)
2012 Jan. 7 Cash .......................................................................... 2,100 Sales ................................................................... 2,100 Sold coffee grinders to customers.
7 Cost of Goods Sold ................................................. 840
Merchandise Inventory ..................................... 840 To record cost of January 7 sale (60 x $14).
21 Estimated Warranty Liability .................................. 532
Merchandise Inventory ..................................... 532 To record cost of coffee grinder
warranty replacements (38 x $14).
31 Warranty Expense ................................................... 210
Estimated Warranty Liability ............................ 210 To record coffee grinder warranty expense
and liability at 10% of selling price.
2. Warranty expense for November 2011 and December 2011
Sales Percent Warranty Expense
November ........................ $1,750 10% $ 175 December ......................... 5,250 10 525 Total .................................. $7,000 $ 700
3. Warranty expense for January 2012
Sales in January............................................................... $2,100 Warranty percent ............................................................. 10% Warranty expense ............................................................ $ 210
4. Balance of the estimated liability as of December 31, 2011
Warranty expense for November ................................... $ 175 credit Warranty expense for December .................................... 525 credit Cost of replacing items in December (23 x $14) ........... (322) debit Estimated Warranty Liability balance ............................ $ 378 credit
5. Balance of the estimated liability as of January 31, 2012
Beginning balance ........................................................... $ 378 credit Warranty expense for January ....................................... 210 credit Cost of replacing items in January (38 x $14) ............... (532) debit Estimated Warranty Liability balance ............................ $ 56 credit
Chapter 11 - Current Liabilities and Payroll Accounting
11-29
Problem 11-3B (60 minutes) 1. Virgo Co. = = 1.33 2. Zodiac Co. = = 2.00 3. Sales increase by 10% (multiply prior sales by 1.10)
Virgo Co. Zodiac Co.
Sales ........................................ $132,000 $132,000 Variable expenses ................. 66,000 99,000 Income before interest .......... 66,000 33,000 Interest expense (fixed) ......... 45,000 15,000 Net income .............................. $ 21,000 $ 18,000
Net income increases by ....... 40% 20% 4. Sales increase by 40% (multiply prior sales by 1.40)
Virgo Co. Zodiac Co.
Sales ........................................ $168,000 $168,000 Variable expenses ................. 84,000 126,000 Income before interest .......... 84,000 42,000 Interest expense (fixed) ......... 45,000 15,000 Net income .............................. $ 39,000 $ 27,000
Net income increases by ....... 160% 80% 5. Sales increase by 90% (multiply prior sales by 1.90)
Virgo Co. Zodiac Co.
Sales ........................................ $228,000 $228,000 Variable expenses ................. 114,000 171,000 Income before interest .......... 114,000 57,000 Interest expense (fixed) ......... 45,000 15,000 Net income .............................. $ 69,000 $ 42,000
Net income increases by ....... 360% 180%
Income before interest & taxes
Interest expense
Income before interest & taxes
Interest expense
$60,000
$45,000
$30,000
$15,000
Chapter 11 - Current Liabilities and Payroll Accounting
11-30
Problem 11-3B (Concluded) 6. Sales decrease by 20% (multiply prior sales by 0.80)
Virgo Co. Zodiac Co.
Sales ........................................ $ 96,000 $ 96,000 Variable expenses ................. 48,000 72,000 Income before interest .......... 48,000 24,000 Interest expense (fixed) ......... 45,000 15,000 Net income .............................. $ 3,000 $ 9,000
Net income decreases by ...... -80% -40% 7. Sales decrease by 50% (multiply prior sales by 0.50)
Virgo Co. Zodiac Co.
Sales ........................................ $ 60,000 $ 60,000 Variable expenses ................. 30,000 45,000 Income before interest .......... 30,000 15,000 Interest expense (fixed) ......... 45,000 15,000 Net income .............................. $(15,000) $ 0
Net income decreases by ...... -200% -100% 8. Sales decrease by 80% (multiply prior sales by 0.20)
Virgo Co. Zodiac Co.
Sales ........................................ $ 24,000 $24,000 Variable expenses ................. 12,000 18,000 Income before interest .......... 12,000 6,000 Interest expense (fixed) ......... 45,000 15,000 Net income .............................. $(33,000) $(9,000)
Net income decreases by ...... -320% -160% 9. The higher fixed cost strategy (having more fixed interest expense) of
Virgo Co. accentuates the effects of increases and decreases in sales. That is, increases in sales produce greater increases in net income and decreases in sales produce greater decreases in net income. The higher fixed cost strategy of Virgo Co. is indicated by a lower value of the times interest earned ratio.
The higher fixed cost strategy works fine if the sales level increases. Virgo Co. enjoys substantially greater increases in its net income because it has made this choice (see parts 3, 4, and 5).
The lower fixed cost strategy protects the company if the sales level decreases. Zodiac Co. experiences much smaller decreases in its net income because it has made this choice (see parts 6, 7, and 8).
Chapter 11 - Current Liabilities and Payroll Accounting
11-31
Problem 11-4B (60 minutes) 1. Each employee’s FICA withholdings for Social Security
Alli Eve Hong Juan Total
Maximum base ............ $106,800 $106,800 $106,800 $106,800
Earned through 9/23 ... 104,300 36,650 6,650 22,200
Amount subject to tax $ 2,500 $ 70,150 $100,150 $ 84,600
Earned this week ......... $ 2,500 $ 1,515 $ 475 $ 600
Subject to tax ............... $ 2,500 $ 1,515 $ 475 $ 600
Tax rate ........................ 6.20% 6.20% 6.20% 6.20%
Social Security tax ...... $ 155.00 $ 93.93 $ 29.45 $ 37.20 $315.58
2. Each employee’s FICA withholdings for Medicare (no limits)
Alli Eve Hong Juan Total
Earned this week ......... $ 2,500 $ 1,515 $ 475 $ 600
Tax rate ........................ 1.45% 1.45% 1.45% 1.45%
Medicare tax ................ $ 36.25 $ 21.97 $ 6.89 $ 8.70 $ 73.81
3. Employer’s FICA taxes for Social Security
Alli Eve Hong Juan Total
Amount from part 1 ..... $ 155.00 $ 93.93 $ 29.45 $ 37.20 $315.58
4. Employer’s FICA taxes for Medicare
Alli Eve Hong Juan Total
Amount from part 2 ..... $ 36.25 $ 21.97 $ 6.89 $ 8.70 $ 73.81
Chapter 11 - Current Liabilities and Payroll Accounting
11-32
Problem 11-4B(Concluded)
5. Employer’s FUTA taxes Alli Eve Hong Juan Total
Maximum base ............ $ 7,000 $ 7,000 $ 7,000 $ 7,000 Earned through 9/23 ... 104,300 36,650 6,650 22,200 Amount subject to tax . $ 0 $ 0 $ 350 $ 0
Earned this week ........ $ 2,500 $ 1,515 $ 475 $ 600 Subject to tax .............. $ 0 $ 0 $ 350 $ 0 Tax rate ........................ 0.8% 0.8% 0.8% 0.8% FUTA tax ...................... $ 0.00 $ 0.00 $ 2.80 $ 0.00 $ 2.80
6. Employer’s SUTA taxes Alli Eve Hong Juan Total
Subject to tax (from 5) . $ 0 $ 0 $ 350 $ 0 Tax rate ........................ 1.75% 1.75% 1.75% 1.75% SUTA tax ..................... $ 0.00 $ 0.00 $ 6.13 $ 0.00 $ 6.13
7. Each employee’s net (take-home pay) Alli Eve Hong Juan Total
Gross earnings............. $2,500.00 $1,515.00 $475.00 $600.00 $5,090.00 Less FICA Social Sec. tax .... (155.00) (93.93) (29.45) (37.20) (315.58) FICA Medicare taxes ... (36.25) (21.97) (6.89) (8.70) (73.81) Withholding taxes ........ (198.00) (182.00) (52.00) (48.00) (480.00) Health insurance .......... (22.00) (22.00) (22.00) (22.00) (88.00) Take-home pay ............. $2,088.75 $1,195.10 $364.66 $484.10 $4,132.61
8. Employer’s total payroll-related expense for each employee Alli Eve Hong Juan Total
Gross earnings............. $2,500.00 $1,515.00 $475.00 $600.00 $5,090.00 Plus FICA Social Sec. tax .... 155.00 93.93 29.45 37.20 315.58 FICA Medicare taxes ... 36.25 21.97 6.89 8.70 73.81 FUTA tax ....................... 0.00 0.00 2.80 0.00 2.80 SUTA tax ....................... 0.00 0.00 6.13 0.00 6.13 Health insurance .......... 22.00 22.00 22.00 22.00 88.00 Pension contrib. (5%) .. 125.00 75.75 23.75 30.00 254.50 Total payroll .................. $2,838.25 $1,728.65
2.49
$566.02 $697.90 $5,830.82
Chapter 11 - Current Liabilities and Payroll Accounting
11-33
Problem 11-5B (25 minutes) Part 1
Jan. 8 Sales Salaries Expense ........................................... 69,490
Office Salaries Expense .......................................... 42,450
Delivery Wages Expense ......................................... 2,060
FICA—Social Security Taxes Payable* ............ 7,068
FICA—Medicare Taxes Payable** ..................... 1,653
Employee Fed. Income Taxes Payable ............ 17,250
Employee Med. Insurance Payable .................. 2,320
Employee Union Dues Payable ........................ 275
Salaries Payable ................................................. 85,434
To record payroll for period.
* $114,000 x 6.2% = $7,068 ** $114,000 x 1.45% = $1,653
Part 2
Jan. 8 Payroll Taxes Expense ............................................ 13,509
FICA—Social Security Taxes Payable ............. 7,068
FICA—Medicare Taxes Payable ........................ 1,653
State Unemployment Taxes Payable* .............. 3,876
Federal Unemployment Taxes Payable** ........... 912
To record employer payroll taxes.
* $114,000 x .034 = $3,876
**$114,000 x .008 = $912
Chapter 11 - Current Liabilities and Payroll Accounting
11-34
Problem 11-6BA (50 minutes) June 15 FICA—Social Security Taxes Payable ................... 744 FICA—Medicare Taxes Payable ............................. 174 Employee Fed. Income Taxes Payable .................. 900 Cash .................................................................... 1,818 To record payment of FICA and
federal income taxes.
30 Office Salaries Expense .......................................... 2,000 Shop Wages Expense ............................................. 4,000 FICA—Social Security Taxes Payable ............. 372 FICA—Medicare Taxes Payable ....................... 87 Employee Fed. Income Taxes Payable ............ 900 Salaries Payable ................................................ 4,641 To record payroll period.
30 Salaries Payable ...................................................... 4,641 Cash .................................................................... 4,641 To record payment of payroll.*
*The check numbers may be entered in the Payroll Register.
30 Payroll Taxes Expense* ........................................... 699 FICASocial Security Taxes Payable ............. 372
FICAMedicare Taxes Payable ....................... 87
State Unemployment Taxes Payable ............... 200 Federal Unemployment Taxes Payable ........... 40 To record employer payroll taxes. *Amount earned through 5/31 = 5 x $1,200 = $6,000 Subject to SUTA/FUTA in June = $7,000 - $6,000 = $1,000 SUTA = $1,000 x 5 employees x 4.0% = $200 FUTA = $1,000 x 5 employees x 0.8% = $40 FICASocial Security Taxes = $372 (same as employees)
FICAMedicare Taxes = $87 (same as employees)
Chapter 11 - Current Liabilities and Payroll Accounting
11-35
Problem 11-6BA (Concluded) July 15 FICASocial Security Taxes Payable ................... 744
FICAMedicare Taxes Payable ............................. 174
Employee Fed. Income Taxes Payable .................. 900 Cash .................................................................... 1,818 To record payment of FICA and
federal income taxes.
15 State Unemployment Taxes Payable ..................... 680 Cash .................................................................... 680 To record payment of SUTA taxes
[$480 + $200].
31 Federal Unemployment Taxes Payable ................. 136 Cash .................................................................... 136 To record payment of FUTA taxes
[$96 + $40].
31 No entry required upon mailing Form 941.
Chapter 11 - Current Liabilities and Payroll Accounting
11-36
Serial Problem — SP 11
Serial Problem — SP 11, Business Solutions (30 minutes)
1. Gross pay (8 days x $125 per day) ................................... $1,000.00 FICA Social Security tax deduction (6.2%)* ..................... $ 62.00 FICA Medicare tax deduction (1.45%) .............................. 14.50 Income tax deduction ........................................................ 159.00 Total deductions ................................................................. 235.50
Net Pay ................................................................................ $ 764.50
*Employee has not reached the maximum limit.
2. 2012
Feb. 26 Wages Expense ....................................................... 1,000.00 FICA—Social Security Taxes Payable ............. 62.00 FICA—Medicare Taxes Payable ....................... 14.50 Employee Federal Income Taxes Payable ...... 159.00 Cash .................................................................... 764.50 To record payroll period.
3. 2012
Feb. 26 Payroll Taxes Expense ............................................ 124.50 FICA—Social Sec. Taxes Payable .................... 62.00 FICA—Medicare Taxes Payable ....................... 14.50 State Unemployment Taxes Payable* .............. 40.00 Federal Unemployment Taxes Payable** ........... 8.00 To record employer payroll taxes.
* $1,000 x .04 = $40.00
**$1,000 x .008 = $8.00
4. 2012
Mar. 25 Accounts Receivable – Wildcat Services .............. 2,912 Sales ................................................................... 2,800 Sales Taxes Payable ......................................... 112 Sold merchandise on credit and collected
sales tax of 4%.
Mar. 25 Cost of Goods Sold ................................................. 2,002 Merchandise Inventory ..................................... 2,002 To record cost of March 25 sale.
Chapter 11 - Current Liabilities and Payroll Accounting
11-37
Comprehensive Problem
Bug-Off Exterminators (100 minutes)
Part 1
a. Correct ending balance of cash and the amount of the omitted check Balance per bank .................................. $15,100 Plus deposit in transit .......................... 2,450 Less outstanding checks ..................... (1,800) Reconciled balance .............................. $15,750 Balance per books ................................ $17,000 Plus interest earned.............................. 52 Less service charges ........................... (15) Balance before omitted check ............. 17,037 Reconciled balance (from above) ............ (15,750)
Omitted check ....................................... $ 1,287 b. Allowance for doubtful accounts
Unadjusted balance .............................. $ 828 credit Anticipated write-off ............................. (679) debit Revised unadjusted balance ............... 149 credit Desired ending balance ....................... 700 credit Necessary adjustment .......................... $ 551 credit
c. Depreciation expense on the truck
Cost ..................................................................... $32,000 Less salvage value ............................................ (8,000) Depreciable cost ................................................ $24,000 Useful life (years) ............................................... 4 Annual depreciation for 2011 ........................... $ 6,000
d. Depreciation expense on the equipment
Sprayer Injector
Cost ........................................................ $27,000 $18,000 Less salvage value ............................... (3,000) (2,500) Depreciable cost ................................... $24,000 $15,500
Useful life (years) .................................. 8 5 Depreciation for 2011 ........................... $ 3,000 $ 3,100
Chapter 11 - Current Liabilities and Payroll Accounting
11-38
Comprehensive Problem (Continued) e. Adjusted revenue and unearned revenue balances
Total advance received ........................................ $ 3,840 Months in contract ................................................ 12 Revenue per month .............................................. $ 320 Months of services provided ............................... 5 Total earned ($320 x 5 months) ........................... (1,600) Overstatement of revenue ($3,840 – $1,600) ...... $ 2,240 Extermination Services Revenue account Unadjusted balance .............................................. $60,000 Overstatement ....................................................... (2,240) Adjusted balance .................................................. $57,760 Unearned Services Revenue account Unadjusted balance .............................................. $ 0 Adjustment ............................................................ 2,240 Adjusted balance .................................................. $ 2,240
f. Warranty expense
Adjusted services revenue for the year (from e) .... $57,760 Warranty percent ................................................. 2.5% Warranty expense (estimated) ............................ $ 1,444
Estimated warranty liability Unadjusted balance ............................................. $ 1,400 credit Warranty expense ................................................ 1,444 credit
Ending adjusted balance .................................... $ 2,844 credit
g. Note payable and interest accrual
The note originated on December 31, 2011. The first time interest will be payable is December 31, 2012. The annual interest expense on the note is $1,200 ($15,000 x .08). Thus, the adjusted balance for both Interest Payable and Interest Expense at December 31, 2011, is zero.
Chapter 11 - Current Liabilities and Payroll Accounting
11-39
Comprehensive Problem (Continued)
Part 2
BUG-OFF EXTERMINATORS December 31, 2011
Unadjusted Trial Balance
Adjustments .
Adjusted Trial Balance
Cash ........................................... $ 17,000 (a) $1,250 $ 15,750
Accounts receivable ................. 4,000 (b1) 679 3,321
Allowance for doubtful accounts ..................
$ 828
(b1)
$ 679
(b2)
551
$ 700
Merchandise inventory ............ 11,700 11,700
Trucks ......................................... 32,000 32,000
Accum. deprec.–Trucks ........... 0 (c) 6,000 6,000
Equipment .................................. 45,000 45,000
Accum. deprec.–Equip ............ 12,200 (d) 6,100 18,300
Accounts payable ..................... 5,000 (a) 1,287 3,713
Estim. warranty liability ............ 1,400 (f) 1,444 2,844
Unearned services rev ............. 0 (e) 2,240 2,240
Interest payable ........................ 0 0
Long-term notes payable ........ 15,000 15,000
D. Buggs, Capital ...................... 59,700 59,700
D. Buggs, Withdrawals ............ 10,000 10,000
Extermination services revenue ....................
60,000
(e)
2,240
57,760
Interest revenue ........................ 872 (a) 52 924
Sales ............................................ 71,026 71,026
Cost of goods sold ................... 46,300 46,300
Deprec. expense–Trucks ......... 0 (c) 6,000 6,000
Deprec. expense–Equip ........... 0 (d) 6,100 6,100
Wages expense ......................... 35,000 35,000
Interest expense ........................ 0 0
Rent expense ............................. 9,000 9,000
Bad debts expense ................... 0 (b2) 551 551
Miscellaneous expense ........... 1,226 (a) 15 1,241
Repairs expense ....................... 8,000 8,000
Utilities expense ........................ 6,800 6,800
Warranty expense ..................... 0 _______ (f) 1,444 ______ 1,444 _______
Totals .......................................... $226,026 $226,026 $18,316 $18,316 $238,207 $238,207
Chapter 11 - Current Liabilities and Payroll Accounting
11-40
Comprehensive Problem (Continued) Part 3 2011
(a) Miscellaneous Expenses ............................................ 15
Accounts Payable ........................................................ 1,287
Interest Revenue .................................................... 52
Cash ........................................................................ 1,250
Adjust cash account. (Separate entries are acceptable.)
(b1) Allowance for Doubtful Accounts ............................... 679
Accounts Receivable ............................................. 679
Wrote off uncollectible accounts.
(b2) Bad Debts Expense ...................................................... 551
Allowance for Doubtful Accounts ......................... 551
Recognize bad debts expense.
(c) Depreciation Expense—Trucks ................................... 6,000
Accumulated Depreciation—Trucks ..................... 6,000
Depreciation on truck.
(d) Depreciation Expense—Equipment ............................ 6,100
Accumulated Depreciation—Equipment .............. 6,100
Depreciation on equipment.
(e) Extermination Services Revenue ................................ 2,240
Unearned Services Revenue ................................. 2,240
Adjust for unearned revenues.
(f) Warranty Expense ........................................................ 1,444
Estimated Warranty Liability ................................. 1,444
Estimate warranty expense.
(g) No interest accrual required for 2011
Chapter 11 - Current Liabilities and Payroll Accounting
11-41
Comprehensive Problem (Continued)
Part 4
BUG-OFF EXTERMINATORS Income Statement
For Year Ended December 31, 2011
Revenues
Extermination services revenue ............... $57,760
Sales ............................................................ 71,026
Interest revenue ......................................... 924
Total revenues............................................ $129,710
Expenses
Cost of goods sold .................................... 46,300
Depreciation expense—Trucks ................ 6,000
Depreciation expense—Equipment ......... 6,100
Wages expense .......................................... 35,000
Interest expense......................................... 0
Rent expense.............................................. 9,000
Bad debts expense .................................... 551
Miscellaneous expenses ........................... 1,241
Repairs expense ........................................ 8,000
Utilities expense......................................... 6,800
Warranty expense ...................................... 1,444
Total expenses ........................................... 120,436
Net income ................................................... $ 9,274
BUG-OFF EXTERMINATORS Statement of Owner’s Equity
For Year Ended December 31, 2011
D. Buggs, Capital, December 31, 2010 ......................... $ 59,700
Add: Investments by owner ........................................ 0
Net income ........................................................... 9,274
68,974
Less: Withdrawals by owner ........................................ (10,000)
D. Buggs, Capital, December 31, 2011 ........................ $ 58,974
Chapter 11 - Current Liabilities and Payroll Accounting
11-42
Comprehensive Problem
Part 4 (concluded)
BUG-OFF EXTERMINATORS Balance Sheet
December 31, 2011
Assets Current assets
Cash ................................................................ $15,750
Accounts receivable ...................................... $ 3,321
Allowance for doubtful accounts ................. (700) 2,621
Merchandise inventory ................................. 11,700
Total current assets ...................................... 30,071
Plant assets
Trucks ............................................................. 32,000
Accumulated depreciation—Trucks ............ (6,000) 26,000
Equipment ...................................................... 45,000
Accumulated depreciation—Equipment ..... (18,300) 26,700
Total plant assets .......................................... 52,700
Total assets ...................................................... $82,771
Liabilities
Current liabilities
Accounts payable .......................................... $ 3,713
Estimated warranty liability .......................... 2,844
Unearned services revenue .......................... 2,240
Total current liabilities .................................. $ 8,797
Long-term liabilities
Long-term notes payable .............................. 15,000
Total liabilities .................................................. 23,797
Equity
D. Buggs, Capital ............................................. 58,974
Total liabilities and equity ............................... $82,771
Chapter 11 - Current Liabilities and Payroll Accounting
11-43
Reporting in Action — BTN 11-1 1. Times interest earned
($ thousands)
2010 Fiscal Year
2009 Fiscal Year
2008 Fiscal Year
Net income ................................................. $2,457,144 $1,892,616 $1,293,867
Add income taxes ...................................... 809,366 907,747 516,653
Income before taxes .................................. 3,266,510 2,800,363 1,810,520
Add interest expense ................................ 1 502 31
Income before interest and taxes ............ $3,266,511 $2,800,865 $1,810,551
Times interest earned ratio .................. 3,266,511. 5,579.4 58,403.9
Analysis comment: For each of these fiscal years, it is obvious that Research In Motion’s risk of not being able to cover its interest expense is low. In addition, Research In Motion’s times interest earned ratio is markedly higher than the industry average of 18.1 for all three years.
2. Gift card liabilities arise when a customer purchases a gift card. It is deferred (unearned) revenue until the gift card recipient buys merchandise using (redeeming) the card.
3. Yes. Research In Motion has both commitments and contingencies (see its Note No.12). Its contingencies arise from (a) a credit facility, (b) lease commitments, and (c) litigation.
4. The solution depends on the financial statement information accessed.
Chapter 11 - Current Liabilities and Payroll Accounting
11-44
Comparative Analysis — BTN 11-2
1. Research In Motion—Times interest earned
($ millions)
Current Year
One Year Prior
Two Years Prior
Net income .................................................. $2,457.144 $1,892.616 $1,293.867
Add income taxes ...................................... 809.366 907.747 516.653 Add interest expense ................................ .001 .502 .031 Income before taxes and interest ............. $3,266.511 $2,800.865 $1,810.551 Times interest earned ratio ................... 3,266,511.0a 5,579.4b 58,404.9c
a$3,266.511/$0.001
b$2,800.865/$0.502
c$1,810.551/$0.031
Apple—Times interest earned
($ millions)
Current Year
One Year Prior
Two Years Prior
Net income .................................................. $ 8,235 $6,119 $3,495
Add income taxes ...................................... 3,831 2,828 1,511
Add interest expense ................................ 3 2 1
Income before taxes and interest ............. $12,069 $8,949 $5,007
Times interest earned ratio ................... 4,023a 4,475b 5,007c
a$12,069/$3
b$ 8,949/$2
c$ 5,007/$1
2. Research In Motion and Apple both are in very strong positions in their
ability to make any interest payments should their income decline. For
all three years, Research In Motion’s times interest earned markedly
exceeded the industry average of 18.1. For each of the three years,
Apple too had times interest earned metrics that substantially exceeded
the industry average of 18.1. The difference between Research In
Motion and Apple is not worth mentioning as both are strong.
Chapter 11 - Current Liabilities and Payroll Accounting
11-45
Ethics Challenge — BTN 11-3 1. It is in Bly’s self-interest to maximize the amount of revenues less
warranty expenses so as to maximize his personal bonus. Since Bly
has some input into setting the warranty expense accrual percent, he
potentially faces an ethical dilemma. Specifically, the lower the
expense accrual, the lower the warranty expense, and the higher his
bonus. (The evidence indicates that Bly has tended to overestimate
warranty expense in prior years.)
2. Although Bly might be able to affect the amount of revenues less
warranty expenses via the warranty expense accrual in the short run,
over several years the amounts should even out. The dealership
should probably adjust the warranty expense accrual to match the
usual (average) experience over time. Given the variable nature of
warranty expenses, at times it might warrant being adjusted upward
(lowering Bly’s bonus) or downward (increasing Bly’s bonus). The
accountant and others should offer input into this decision. Since the
experience with warranties has varied, a percent should perhaps be
based on a long-run average, with some additional weight given to
recent experience.
Chapter 11 - Current Liabilities and Payroll Accounting
11-46
Communicating in Practice — BTN 11-4
MEMORANDUM To: Madeline Pretti, General Manager From: Dustin Clemens, ManagerAccounting and Finance Date: Subject: Reporting warranties in financial statements This memorandum is in response to your comment on my proposal for the
treatment of a contingency in our financial statements. You specifically
object to the proposed recognition of an expense and liability for
warranties. The purpose of this memorandum is to respond to your
objection.
Both the conservatism and matching principles apply to accounting for
warranties. Conservatism requires us to include an expense in this year’s
financial statements for costs that we may or may not pay in the future.
Another point in favor of reporting the expense and liability now is that we
offered the warranty in order to achieve the reported sales. Therefore, our
income measure would be incomplete if it did not match the cost of
fulfilling the warranty against revenues generated by offering the warranty.
This treatment would be in compliance with the matching principle.
Your comment also raised the objection that we don’t know what costs
will be. If they are not reasonably estimable, generally accepted
accounting principles will allow us to leave them out of the financial
statements. But we must describe the contingency in the notes. I will be
checking with the product design engineers to get their opinion on the
reasonableness of repair costs. If the product is different from others, we
may have a basis for going with only a note disclosure. However, financial
statement recognition is a more effective way to get the information into
users’ hands. As a result, it is usually preferred, even if we are uncertain
about the amount.
Chapter 11 - Current Liabilities and Payroll Accounting
11-47
Taking It to the Net — BTN 11-5 1. McDonald’s 2009 current liabilities include the following
Accounts payable
Income taxes
Other taxes
Accrued interest
Accrued payroll and other liabilities
Current maturities of long-term debt 2. The portion of long-term debt maturing in the next 12 months ($
millions) is
$18.1 / ($18.1 + $10,560.3) = 0.17% 3. Times interest earned for McDonald’s as of 12/31/2009
($ millions) 12/31/2009
Net Income ............................................................... $ 4,551.0
Plus income taxes ................................................... 1,936.0
Plus interest expense .............................................. 473.2
Income before interest and taxes .......................... $ 6,960.2
Times interest earned ............................................. 14.7 times
Comment: The 14.7 times interest earned ratio seems more than sufficient for McDonald’s to cover its interest obligations, and it is higher than the industry average of 12.0.
Chapter 11 - Current Liabilities and Payroll Accounting
11-48
Teamwork in Action — BTN 11-6 1. Option A: Interest Expense = $6,000 x 10% x 90/360 = $150 Option B: Interest Expense = $6,000 x 8% x 120/360 = $160
The interest expense in option B does exceed option A. If interest cost is the only consideration, then Option A is the preferred loan. However, if a mere $10 more is paid in interest expense the business can use the loan money for an additional 30 days. The decision on which loan is preferred will ultimately depend on whether interest cost savings is valued more than the additional time to use the loaned money.
2. Entries: 2a. Issue date, Option A
June 1 Cash .......................................................................... 6,000 Notes Payable .................................................... 6,000 Borrowed cash by issuing an
interest-bearing note.
2b. Issue date, Option B
June 1 Cash .......................................................................... 6,000 Notes Payable .................................................... 6,000 Borrowed cash by issuing an
interest-bearing note.
2c. Maturity date, Option A Aug. 30 Notes Payable .......................................................... 6,000 Interest Expense ...................................................... 150 Cash .................................................................... 6,150 Repaid note plus interest.
2d. Maturity date, Option B
Sep. 29 Notes Payable .......................................................... 6,000 Interest Expense ...................................................... 160 Cash .................................................................... 6,160 Repaid note plus interest.
Chapter 11 - Current Liabilities and Payroll Accounting
11-49
Teamwork in Action (Concluded) 4. Entries: 4a. Adjusting entry, Option A (Dec. 31)
Dec. 31 Interest Expense ...................................................... 50 Interest Payable ................................................. 50 Accrue interest on note
payable [$6,000 x 10% x 30/360].
4b. Adjusting entry, Option B (Dec. 31)
Dec. 31 Interest Expense ...................................................... 40 Interest Payable ................................................. 40 Accrue interest on note payable
[$6,000 x 8% x 30/360].
4c. Maturity date entry, Option A March 1 Interest Expense ...................................................... 100 Interest Payable ....................................................... 50 Notes Payable .......................................................... 6,000 Cash .................................................................... 6,150 Repaid note plus interest.
4d. Maturity date entry, Option B March 31 Interest Expense ...................................................... 120 Interest Payable ....................................................... 40 Notes Payable .......................................................... 6,000 Cash .................................................................... 6,160 Repaid note plus interest.
Chapter 11 - Current Liabilities and Payroll Accounting
11-50
Entrepreneurial Decision — BTN 11-7 1.
SnorgTees Income Statement (Prospective)
Current Operations
European Total
Sales ............................................. $1,000,000 $ 250,000 $1,250,000
Cost of goods sold (30%) ........... 300,000 75,000 375,000
Gross profit ................................. 700,000 175,000 875,000
Operating expenses (25%) ......... 250,000 62,500 312,500
Income before interest ............... 450,000 112,500 562,500
Interest expense.......................... 0 21,000 21,000
Net income ................................... $ 450,000 $ 91,500 $ 541,500
2. Times interest earned = $562,500 / $21,000 = 26.8 times
3.
SnorgTees Income Statement (Prospective)
Current Operations
European Total
Sales ............................................. $1,000,000 $ 400,000 $1,400,000
Cost of goods sold (30%) ........... 300,000 120,000 420,000
Gross profit ................................. 700,000 280,000 980,000
Operating expenses (25%) ......... 250,000 100,000 350,000
Income before interest ............... 450,000 180,000 630,000
Interest expense.......................... 0 21,000 21,000
Net income ................................... $ 450,000 $ 159,000 $ 609,000
Times interest earned = $630,000 / $21,000 = 30.0 times
Chapter 11 - Current Liabilities and Payroll Accounting
11-51
Entrepreneurial Decision (concluded)
4.
SnorgTees Income Statement (Prospective)
Current Operations
European Total
Sales ............................................. $1,000,000 $ 100,000 $1,100,000
Cost of goods sold (30%) ........... 300,000 30,000 330,000
Gross profit ................................. 700,000 70,000 770,000
Operating expenses (25%) ......... 250,000 25,000 275,000
Income before interest ............... 450,000 45,000 495,000
Interest expense.......................... 0 21,000 21,000
Net income ................................... $ 450,000 $ 24,000 $ 474,000
Times interest earned = $495,000 / $21,000 = 23.6 times
5. In each of these cases, SnorgTees’ times interest earned is at least 23.6, so it appears that if it takes out the loan and can generate at least $100,000 in sales in Europe, then the company will have little trouble paying its interest expense.
Hitting the Road — BTN 11-8 There is no formal solution to this problem. A discussion of the importance of safeguarding social security information would be appropriate especially with respect to the Administration’s decision to no longer transfer benefit information online.
Chapter 11 - Current Liabilities and Payroll Accounting
11-52
Global Decision — BTN 11-9 1. Nokia — Times interest earned
(Euro millions) Current Year One Year Prior
Net income ................................................. € 260 €3,889
Add income taxes ...................................... 702 1,081
Income before income taxes .................... 962 4,970
Add interest expense ................................ 243 185
Income before taxes and interest ............ €1,205 €5,155
Times interest earned ratio ....................... 5.0a 27.9b
a1,205/ 243
b5,155/ 185
2. Of these three companies, Research In Motion and Apple both have
superior coverage of interest expense for the current year and prior
year. Specifically, Research In Motion’s times interest earned of 3,267
for the current year is on par with that of Apple’s value of 4,023, and
both markedly exceed Nokia’s value of 5.0. The prior year shows
similar results with the exception of Nokia’s substantially higher times
interest earned of 27.9.